Cooper reforms will not reduce fees for all

Under the changes proposed by the federal government in response to the Cooper review of superannuation, the industry will evolve into three distinct products: MySuper, Choice and self-managed super funds.

The Australian Prudential Regulation Authority will provide a separate licence for funds wanting to issue the MySuper product that will look similar to the default option of a typical industry fund.

MySuper will be reasonably flexible but will not offer investment choice. Members wanting to use another investment strategy will need to take out a Choice product.

As employers will be forced to put the default super guarantee contributions into a MySuper product, all funds will develop these products. Hence, all funds are likely to have two separate products to cater for different groups of members: some might put part of their super into MySuper and the remainder into Choice.

Treasury expects 4.5 million Australians to be shifted into MySuper accounts. The real number could easily be double this.

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One new feature is to provide trustees with a specific duty to deliver value for money as measured by long-term returns, and to actively consider whether the fund has sufficient scale.

Funds will need to demonstrate to APRA that they satisfy this duty. APRA will have the power to wind up funds that lack scale.

As APRA will provide comparative data between funds, there will be pressure on funds to have similar costs and investment strategies to their peers. This will reduce innovation on MySuper products as funds will focus on peer results rather than their own.

SuperStream is designed so that contributions can be paid into member accounts as efficiently as employee salaries end up in their ADI (authorised deposit-taking institution) account. That is, the data and funds should move electronically with no errors.

The use of employees’ tax file numbers for identification and the requirement that businesses provide the right data and funds electronically will cut out many paper-based processes. The industry has sought this for many years and it should lead to reduced costs for industry funds.

Cooper argued that there are too many small funds that lack the scale to deliver good value for their members. He supplied research that showed that a 30-year-old will generate an extra $40,000 at retirement if the concepts of MySuper and SuperStream are introduced.

In fact, fees are going to increase for most members but the government used Cooper’s numbers in its election campaign and has continued to promote this myth.

In the commercial sector, dominated by the bank-owned wealth management companies and AMP/AXA, fees will fall due to the separation of the cost of advice from products – a “Future of Financial Advice" initiative. Also MySuper will replace many expensive products.

In all other sectors, fees will increase through increased requirements for reserves and stronger corporate governance.

The government did not reject many suggestions out of hand. But a few key recommendations were not accepted. Cooper recommended that cross-subsidies between MySuper and Choice accounts be outlawed. The government has modified this to a requirement for trustees to allocate costs fairly between classes of members.

The industry wanted rollover relief on capital gains to encourage fund mergers. The government will extend this only to funds required to merge by APRA.

The government supports continuation of the existing equal representation of employers (mainly employer bodies) and members (mainly trade unions) on trustee boards – Cooper wanted more independent trustees to provide a diversity of skills.

The government does not support licensing of administrators or clearing houses. This is surprising as these organisations hold significant amounts of money and are potential risks for funds.

The government has also deferred two hard decisions. It made no decision on the eligibility for default funds under industrial awards as industry funds want to continue with their monopoly over award superannuation. This may be difficult to justify if all MySuper funds by definition provide reasonable value for members.

It also ignored retirement income. As the baby-boomers enter retirement, pension numbers will grow dramatically, so this issue cannot be ignored for much longer.

Will the government achieve its stated objectives?

Certainly, products with excessive fees will disappear, but fees for most members will continue to rise as super funds deliver more services.

There is reasonable competition in the system already but it is difficult and expensive to change funds. Also, the award system protects some small funds that would be better off merging into others.

Competition may well be directed towards Choice members rather than MySuper

This review will be a catalyst for change, but it won’t end tinkering with the system. We have had annual changes since 1983 and can expect this to continue.

Mostly it tries to provide equity and integrate superannuation, taxation and social security. Our system has a long way to go before this will be achieved.